Unfortunately for some shareholders, the Shenzhen Changfang Group Co., Ltd. (SZSE:300301) share price has dived 27% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 42% share price drop.

Since its price has dipped substantially, Shenzhen Changfang Group may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.4x, since almost half of all companies in the Semiconductor industry in China have P/S ratios greater than 5.9x and even P/S higher than 10x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

What Does Shenzhen Changfang Group's Recent Performance Look Like?

For example, consider that Shenzhen Changfang Group's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

Shenzhen Changfang Group's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 38%. The last three years don't look nice either as the company has shrunk revenue by 56% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 34% shows it's an unpleasant look.

In light of this, it's understandable that Shenzhen Changfang Group's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Shenzhen Changfang Group's P/S?

Shares in Shenzhen Changfang Group have plummeted and its P/S has followed suit. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Shenzhen Changfang Group confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Shenzhen Changfang Group that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.